Geithner: Housing system needs government support

HUD chief Donovan urges reduced Washington involvement in mortgages

By

RonaldD. Orol

WASHINGTON (MarketWatch) -- Without government backing for the housing finance system, future economic downturns could be harsher, Treasury Secretary Timothy Geithner said Tuesday at a conference on the future of housing finance.

"Without such support, the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale," Geithner said.

Geithner and other policy makers in discussing the future of Fannie Mae
FNMA, +7.56%
and Freddie Mac
FMCC, +7.46%
at a highly anticipated conference.

The two mortgage giants were essentially nationalized at the peak of the crisis in 2008 to avoid losses and stem the credit contagion. So far, they've cost taxpayers roughly $145 billion in funds, used to cover their losses, with more losses expected on the horizon.

And reform is still a long ways off. The Obama administration is still in the early stages of identifying its own proposal, which Congress is due to consider in January. After that, key lawmakers are expected to start drafting legislative efforts to reform the mortgage-giants. Read Geithner's remarks.

Geithner added that different countries provide that support in a variety of ways, employing explicit and implicit approaches, but that the question that should be asked is "how much" government support should be provided.

"It requires a broad reassessment of how much support the government should provide for housing finance," Geithner said.

Meanwhile, participants at the conference largely agreed that subsidies for housing need to be reduced but not eliminated even as they disagreed on how far government assistance to the mortgage market should be curtailed. Read about the conference.

The goal of the conference is to come up with a system that would win the support of enough lawmakers on Capitol Hill to pass while also ensuring a fully functional housing market that doesn't rely on taxpayer infusions -- even in a severe economic downturn.

Many Republicans want to fully privatize the two entities altogether, while numerous Democrats want to enshrine a permanent government agency -- or agencies -- to buy and sell mortgages and mortgage securities.

Geithner has said in the past that he's seeking a middle ground -- one in which the government would continue to offer some type of federal guarantee of mortgage loans to ensure that U.S. borrowers can easily finance the purchases of homes -- but has yet to provide specific details.

Shaun Donovan, secretary of the Department of Housing and Urban Development, agreed that the government should play a role in the housing system. However, he acknowledged that it should be reduced from where it is now, where 90% of all mortgage loans are guaranteed by Fannie and Freddie and the Federal Housing Administration.

"To be clear the government's footprint in the housing market needs to be smaller than it is today," he told the conference.

PIMCO: Without guarantee, moribund housing market

Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said that without government guarantees, mortgages would be hundreds of basis points higher, resulting in a moribund housing market for years. He added that PIMCO would not buy a privately insured mortgage pool unless it was made up of mortgages that each had at least a 30% down-payment.

He also warned that without a "positive fiscal stimulus" unemployment rates would continue to rise and approach double digits. Gross recommended a major home refinancing program where homeowners with mortgages that have 5%, 6% or 7% down are reduced to the current 4% rates.

"This home refinancing, to my way of thinking, where you take 5%, 6% or 7% mortgages and turn then into 4% mortgage would provide a push, a stimulus of $50 billion to $60 billion in consumption as well as potential lift of 5% or 10% in home prices," he said.

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